peter grady's declaration re dealer closures

8/14/2019 Peter Grady's Declaration re Dealer Closures

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ATI-2353079v29

EXHIBIT B


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UNITED STATES BANKRUPTCY COURT

SOUTHERN DISTRICT OF NEW YORK

---------------------------------------------------------------In re

Chrysler LLC, et al.,

Debtors.

--------------------------------------------------------------

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Chapter 11

Case No. 09- 50002 (AJG)

(Jointly Administered)

SECOND DECLARATION OF PETER M. GRADY

I, Peter M. Grady, make this Declaration under 28 U.S.C. 1746 and state:

1. I am the current Director of Dealer Operations for Chrysler Motors, LLC,which is a corporation organized under the laws of the state of Delaware, and one of the

above-captioned debtors and debtors in possession (collectively, the "Debtors" or "Chrysler"). I

have worked at Chrysler or an affiliate of Chrysler since 1987. I am older than 21 years of age

and suffer no legal disability. I am competent to make this Declaration.

2. I have worked with Chrysler's dealer network on the marketing anddistribution of Chrysler vehicles for over 20 years. I have held a wide variety of positions at

Chrysler, including Zone Manager or Assistant Zone Manager for Field Operations in Chicago,

Memphis, Phoenix and New York; President of Chrysler Taiwan Ltd; Director of the Great

Lakes Business Center; Director of Mid Atlantic Business Center; Director of Remarketing and

Fleet Operations; and Director of Dealer Operations.

3. As Director of Dealer Operations, I am familiar with the network ofChrysler, Dodge and Jeep dealers that sell and service Chrysler's vehicles in the United States

(the "Domestic Dealer Network") and I am also familiar with Chrysler's international distribution


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networks. I have worked on the dealer programs described in this Declaration and performed the

dealer network analysis described below. Except as otherwise indicated, my testimony in this

Declaration is based upon my personal knowledge, my review of business records or my

first-hand experience and knowledge acquired in the ordinary and regular course of Chrysler's

business as to the matters described in this Declaration. If I were called upon to testify, I could

and would testify competently to the facts set forth in this Declaration.

4. I earned my B.S. and B.A. degree in Management, Marketing and Financefrom John Carroll University in 1981. Virtually my entire professional career has been with

Chrysler. I started in 1984 as a district sales manager at American Motors Corporation, which

was later acquired by Chrysler in 1987. I worked in a variety of positions in the Chicago zone

and served as Assistant Zone Manager for Memphis from 1994 to 1997. In that capacity, I had

responsibilities for working with the dealers in my zone in the sale and service of Chrysler

vehicles. Starting in 1997, I served as President of Chrysler Taiwan, Ltd., where I had

responsibility for overseeing the sales, service and distribution of Chrysler vehicles in Taiwan.

5. In 2000, I became the Zone Manager of Phoenix and, in 2001, I becamethe Zone Manager of New York. As Zone Manager, I was responsible for working with Chrysler

dealers and managing the Chrysler dealer network in my zones. In 2002, Chrysler restructured

its twenty-five zones into eight Business Centers and I became the Director of Great Lakes

Business Center. In 2003, I became the Director of Mid-Atlantic Business Center. In my

capacity as the Director of Business Centers, I had responsibility for the dealer network in the

sale and service of Chrysler vehicles. From 2005 through January 2009, I was the Director of

Remarketing and Fleet Operations and, in that capacity, I supervised the marketing and


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distribution of fleet sales, which includes the sale of vehicles to third party companies such as

rental car companies. In 2009, I began serving as the Director of Dealer Operations.

The Debtors' Domestic Dealer Network

6. Other than certain sales to the government, virtually all of the vehiclesmanufactured by Chrysler are sold to the U.S. general public through Chrysler's Domestic Dealer

Network. Over the years, this Domestic Dealer Network grew to cover all 50 states, peaking at

approximately 6,500 dealers in the mid-1960's, which has subsequently declined over time. As

of April 30, 2009 (the "Petition Date"), the Domestic Dealer Network was comprised of 3,181

dealers. Except with respect to a small number of dealerships, all the dealers are independently

owned.1

7. Approximately 62% of the dealers in the Domestic Dealer Network are"full line" dealers, meaning they sell all three of the Debtors' brands: Chrysler, Jeep and Dodge.

The remaining approximately 38% of the dealers in the Domestic Dealer Network are "partial

line" dealers, selling only one or a combination of two of the Debtors' brands. The Domestic

Dealership Network includes dealers in every U.S. state and in every major U.S. metropolitan

area, as well as widespread coverage of secondary and rural markets.

8. Despite the size and breadth of the Domestic Dealer Network, the salesvolume, productivity and efficiency of the dealer network is not evenly distributed.

Approximately 25% of the Domestic Dealer Network accounts for approximately 50% of the

Debtors' domestic sales. Further, just over 50% of the Domestic Dealer Network accounts for

approximately 90% of the Debtors' domestic sales.

1Debtor Chrysler Realty owned 14 active and seven inactive dealerships as of the Petition Date, referred to

as "manufacturer investment dealerships" or "MIDs."


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The Dealership Agreements

9. Consistent with industry practice, and with the exception of a smallpercentage of dealers using older Direct Dealer Agreements, the Debtors have used a standard

uniform dealership agreement (as modified from time to time) for all new domestic dealers

starting in approximately 1988.2 The Debtors enter intoa separate dealership agreement for each

of the Debtors' linemakes that a dealer sells. Thus, for example, a "full line" dealer will have

three dealership agreements: one for Dodge/Dodge Truck, one for Jeep and one for Chrysler.

The Debtor party to each of these agreements is Chrysler Motors LLC ("Chrysler Motors").

The Challenges Confronting the Domestic Dealer Network

10. Although the Debtors' large and extensive Domestic Dealer Networkprovides increased outlets for the sale of the Debtors' products, its size and scope has created

significant challenges as market conditions and demographic factors have changed over time.

The Debtors' dealers compete not only with dealers selling the products of other Original

Equipment Manufacturers ("OEM's"), such as Ford and Toyota, but also with each other in

surrounding markets. Some of the Debtors' dealers may have only one linemake (for example,

Chrysler, Dodge or Jeep), while other dealers may have all three linemakes. Thus, a

Chrysler-Jeep dealership may compete with a nearby Dodge dealership. For example, a Chrysler

dealer may sell a Chrysler Town & Country minivan and a nearby Dodge dealer may sell the

Dodge Caravan minivan, which may compete for the same customers.

2Specifically, the form of agreement the Debtors have used since approximately 1988 is called, for each

applicable linemake, the Sales and Service Agreement. From approximately the 1960s until thedevelopment of the Sales and Service Agreement, the Debtors used a form of agreement called the DirectDealer Agreement. As of the Petition Date, approximately 112 of the dealerships in the Domestic DealerNetwork continue to be governed under Direct Dealer Agreements. (Copies of the form Dealer Sales andService Agreement and the Direct Dealer Agreement are attached hereto as Exhibit A and Exhibit B,respectively.)


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11. Over time, the market for new motor vehicles has changed dramatically.Numerous other competitors selling a wide variety of vehicles, including Toyota, Honda,

Hyundai and Kia, have entered the market and captured a larger share of the automotive market.

As a result, the larger Domestic Dealer Network has faced increasing financial pressures on

profitability as the market share of the Debtors and other domestic OEMs declined over time in

the face of increasing foreign competition. With so many outlets available for the Debtors'

products and more limited market share, many dealers' annual sales of vehicles (or throughput)

fell below targeted levels, limiting dealer profitability and the ability of many dealers to reinvest

in the dealership and enhance the experience of consumers.

12. In addition, as suburbs grew and the modern interstate system continued toevolve, longstanding dealerships were no longer in the best or growing locations. Many rural

locations also served a diminishing population of potential consumers. Some dealership

facilities became outdated. Other locations faced declining traffic count and declining

populations.

13. By contrast, the newer OEMs selling competitive vehicles, such asToyota, Honda, Hyundai and others, did not enter the U.S. markets or did not significantly

expand within the U.S. markets until much later in time. They did not have the legacy network

dealers. They began to assemble new networks with new and better locations in growing

markets, with numerous models consolidated under a single roof and with more modern facilities

focused on large metropolitan areas.

14. Over time, the throughput of the newer OEMs continued to grow while thethroughput of the Debtors continued to decline. On average, the dealers for several of the newer

OEMs now have substantially higher throughput, resulting in better and more sustainable sales


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and profitability and providing greater resources for marketing, reinvesting in the business,

improving facilities and enhancing the consumer experience and customer service. In 2008,

Chrysler sold approximately 1,000,000 new vehicles through approximately 3,298 dealers. The

average throughput for Chrysler dealers was approximately 303 per dealer. In 2008, Toyota sold

approximately 1,604,952 new vehicles in the United States through approximately 1,242 dealers.

The average throughput for Toyota's dealers in the United States was approximately 1,292 per

dealer. In 2008, Honda sold approximately 1,255,411 new vehicles in the United States through

approximately 1,030 dealers. The average throughput for Honda's dealers in the United States

was 1,219 per dealer.

15. Thus, the throughput for Toyota and Honda dealers is approximately 415percent higher than Chrysler's average throughput. Such larger throughput supports substantially

higher average profits for competitive dealerships, enables those dealerships to invest additional

resources in facilities and other operations, enables competitors to often attract the more

experienced and highly qualified personnel from Chrysler's Domestic Dealer Network, provides

additional resources to advertise products and services to customers, and enables those dealers to

offer extra services and benefits that can improve customer satisfaction for the brands offered.

The smaller, more efficient, more profitable dealer network for the transplant OEM's has become

a competitive disadvantage for Chrysler's Domestic Dealer Network.

16. Chrysler's larger Domestic Dealer Network also substantially increasesexpenses and inefficiencies in the distribution system, forcing Chrysler to spend additional

resources on training, new vehicle allocation personnel, processes, and procedures, oversight of

the dealer network, auditing and monitoring expenses for dealer operations, and all of the other

operational expenses that must be incurred to maintain, support, facilitate and oversee a larger


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dealer network. In addition, the numerous "partial line" dealerships in the Domestic Dealer

Network requires the continued production of overlapping models under different brands, which

further increases unnecessary costs and introduces substantial inefficiencies in the distribution

system.

The Debtors' Dealership Rationalization Project Genesis

17. The Debtors have been actively addressing their dealer network issues fora number of years. As part of the Debtors ongoing business plans, the Debtors have engaged in

a long term process to rationalize their dealer network. The goals of this effort included working

with the dealers to consolidate all three of the Debtors' brands at each dealership and reshape the

network to realign the retail outlets using the best dealers, in the best locations, with the best

facilities. This process has been time-consuming and expensive as a result of a complex web of

state laws that protect dealers and limit the ability of the Debtors to expeditiously terminate,

relocate or consolidate dealerships. Despite these obstacles, and at substantial cost, the Debtors

have reduced their dealer network from approximately 4,320 dealers in 2001 to 3,188 as of

Tuesday, April 28, 2009. As part of their Viability Plan (as defined in other filings), the Debtors

have identified the completion of their dealership rationalization efforts as one of the core

initiatives.

18. Consistent with their Viability Plan, the Debtors are seeking to obtainapproval of the Fiat Transaction as expeditiously as possible. A key component of the Fiat

Transaction is the transfer to New Chrysler of a strong, well-positioned dealer network to

continue selling Chrysler, Dodge and Jeep vehicles to consumers and to service these vehicles.

To that end, the Fiat Transaction contemplates and, in fact, requires the acceleration of the

Debtors' network rationalization. From a business perspective, this effort to strengthen the

Domestic Dealer Network is a critical component of the proposed Fiat Transaction.


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19. As a result, the Debtors have determined that they need reject789 dealership agreements and related ancillary agreements for the long-term health of the

Domestic Dealer Network and to further the objectives of the Debtors as described in this and

other declarations. The rejection of these carefully selected dealership agreements will assist the

Debtors in achieving their goal of strengthening the Domestic Dealer Network in support of

long-term viability and ensuring the success of the Fiat Transaction. In addition, the rejection of

these dealership agreements will help the Debtors rationalize the Domestic Dealer Network in a

manner that substantially improves overall operational efficiencies. With a smaller network

consisting of more "full line" dealerships, the Debtors can also reduce redundancies and

inefficiencies in marketing, distribution, and production that results from overlapping models

offered under multiple linemakes.

20. Chrysler has reviewed a substantial volume of data and carefully analyzedthe Domestic Dealer Network to arrive at its selection of the dealerships included in the Motion.

In 2001, the Debtors initiated a program to: (a) evaluate their dealership network and key

locations; (b) identify the most desirable dealerships and dealership locations from the

perspective of long-term planning; and (c) streamline the Domestic Dealer Network to meet

long-term goals, including, among other things, the consolidation of the Debtors' brands at

"partial line" dealers to make them "full line" dealers. This program has been re-named over the

years and most recently has been called "Project Genesis."

21. The objectives of Project Genesis include brand consolidation, as well asreducing and reconfiguring the Domestic Dealer Network to achieve the goal of having a smaller

and stronger network, with the best dealers, in the best locations, with the best facilities.

Although the overall size of the network would contract as a result of implementing Project


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cooperation with New Chrysler,have continued to refine their evaluation of dealers under

Project Genesis to model an anticipated dealership network for the Alliance Viability Plan and

for the proposed Fiat Transaction.

25. It is critical to the Viability Plan that the dealer network optimized quicklyso that New Chrysler can begin implementing the efficiencies, marketing strategies, production

plans, and model changes that go hand in hand with a smaller, more profitable Domestic Dealer

Network with more "full line" dealerships throughout the country. The alternative would disrupt

and delay the goals of the Viability Plan and implementation of the changes needed to rationalize

the Domestic Dealer Network and obtain the efficiencies associated with those objectives.

The Debtors' Extensive Qualitative Assessment of Each Dealership

26. Project Genesis and the selection of dealerships to be included in the reliefsought in the Motion involved the evaluation of each dealership. In particular, the Debtors

reviewed and analyzed numerous performance and planning factors for each dealership,

including, among other things:

(a) the dealer's (i) brand affiliations;(ii) raw sales volume;(iii) sales performance relative to its Minimum Sales Responsibility;(iv) location;(v) type of market;(vi) facilities;(vii) customer service;(viii) history of experience; and(ix) market share;


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(b) the planning potential for the dealership; and(c) other factors.27. In addition, the Debtors are able to draw on external metrics including,

among other things:

(a) new vehicle registration information for the Debtors' and othermanufacturers' comparable products, indicating the location of newvehicle registrations within the market and the location of registrations ofnew motor vehicles sold by each dealer;

(b) demographic data including (i) current population and household density;(ii) anticipated shift of population and household density; and(iii) average household income;

(c) the average distance to the nearest dealer by manufacturer for eachlocality; and

(d) competing manufacturers' market share within the locality.28. Using these analytical methods, the Debtors can create comprehensive

statistical assessments of each dealer and make reasoned judgments regarding the optimal

configuration for each market in the Domestic Dealer Network and the best means of

implementing the goals of Project Genesis.

29. Consistent with the Alliance Viability Plan and in support of the FiatTransaction, the Debtors have reached the business conclusion that rejection of the Rejected

Dealer Agreements is in the best interests of the Debtors' restructuring efforts and estates.

Moreover, the Debtors believe, in their business judgment, that immediate rejection of these

agreements is necessary and appropriate to begin the work necessary to complete the transition to

a smaller, more effective, and more profitable dealer network, limit any ongoing postpetition

obligations to the Affected Dealers, and minimize disruption upon the closing of the Fiat


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Transaction or other Sale Transaction involving the sale of the Domestic Dealer Network. In

addition, the Debtors believe that any delay in identifying the dealers to remain as part of the

Domestic Dealer Network following the sale would be extraordinarily detrimental to the Debtors'

efforts to preserve the network pending the sale.

30. The Debtors' dealers are facing unprecedented financial challenges in thecurrent economic environment, and will face further strain as a result of the Debtors'

commencement of these cases. The best dealers with the best facilities and locations are being

approached regularly by other OEMs. Others are actively considering other opportunities.

The Debtors believe that it is essential under these circumstances to immediately identify the

Remaining Dealers that will comprise the Domestic Dealer Network following the sale to

provide them with a reason to continue to support the Debtors and the Debtors' products as

they have for many years in the face of these various challenges and pressures. Faced with

further uncertainly about whether they are part of the future plans of New Chrysler, key dealers

may not take the steps needed to complete the transition to new ownership.

31. Thus, it is critical that the Domestic Dealer Network be reconfiguredquickly to create a dealer network that improves the profitability of the best dealers in the best

locations with the best facilities in the Domestic Dealer Network and encourages those dealers to

remain committed to selling and servicing the Debtors' products and undertaking the substantial

investments required to promote the long term growth of the market for Debtors' products,

notwithstanding the current economic uncertainties that those dealers now face.


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EXHIBIT A

TO SECOND DECLARATION OF PETER M. GRADY


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EXHIBIT B

TO SECOND DECLARATION OF PETER M. GRADY


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peter grady's declaration re dealer closures

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